Canadian households now hold the highest debt levels of all G7 countries, as revealed in a new report from the Canada Mortgage and Housing Corporation (CMHC).
Although Canada’s economy largely survived the trials and tribulations of the pandemic, the nation now boasts the highest level of debt among all G7 countries. Crucially, 75% of all household debt consists of mortgages.
The world's economies have struggled amidst the ravages of the pandemic as inflation soared, supply chains were disrupted, and governments provided billions in economic support. However, the same CMHC report has revealed that Canada’s extremely high household debt levels could make the country vulnerable to a global economic crisis.
Exponential growth of household debt
Household debt has been rising in Canada for the past 15 years. Since 2008, when household debt amounted to 80% of the economy, 2021 saw household debt reach 107% of Canada’s GDP, making it larger than the entire economy.
Economists now say that the red light is flashing. Any crisis that prevents people from meeting their debt repayments could cause a catastrophic situation akin to the experience of the U.S. when the housing bubble burst in 2007/2008.
Canada falls behind the pack
Monetary experts cite the relative lack of affordability in the housing market as one of the primary reasons why Canadians have increased their household spending and find themselves in so much debt.
The International Monetary Fund (IMF) also cites Canada’s performance against other developed nations. Over the past five years, Canada, Australia, and New Zealand have followed similar trajectories – and what all three countries have in common is an unaffordable housing market.
IMF figures reveal that 75% of household debt comprises mortgages, putting Canada as a high-risk state for mortgage defaults. Reestablishing an affordable housing market is crucial to strengthening the Canadian economy and protecting households from the perils of a global economic crisis.
To complicate matters, in 2022-2023 the Bank of Canada raised interest rates repeatedly in its battle against inflation, making mortgages even more expensive as lenders adjust to the new economic situation. Currently, variable-rate mortgage holders are in the firing line, but fixed five-year terms will be renewed at higher rates in the coming years.
With Canadian consumers already struggling to keep up, this could spell trouble for tens of thousands of citizens in the future.
Experts warn of perils for Canadian mortgage holders
High household debt levels make Canada particularly vulnerable to an external economic event like a housing crash. Anything that results in widespread job losses could trigger mass foreclosures nationwide.
The Canadian financial system has recognized this risk and has prepared by stress-testing its financial institutions. However, despite these tests, high unemployment levels in a high-debt economy would still lead to a more severe recession in Canada than in other G7 nations.
But economists believe there is a positive long-term outlook. More debt today means more assets purchased. While the short-term effects will mean slower economic growth – as it has in the U.S. – the long-term impacts could result in a more robust Canadian economy.
New interest rate landscape for Canadian households
Homeowners have been warned that the current landscape of rising interest rates may not be a temporary thing. Historically low-interest rates since the 2008 crisis have been a near-permanent fixture across the global economy, but economists claim this has led to secular stagnation.
This phenomenon has helped stabilise economies but has also prevented significant economic growth.
For this reason, householders must be prepared to cope with current interest rates for some time. Proponents of higher interest rates have also argued that interest rates may have to stay high to confront Canada’s ageing population and declining birth rates, as cities must adjust their infrastructures accordingly.
Low-income Canadians struggling the most
Some politicians and economists have raised concerns that the fallout of high debt and interest rates has disproportionately hit the lowest-income strata. As of February this year, a report revealed that 63% of Canadians are now concerned about the impacts of a stagnant income, high-inflation economy.
It is no secret that lower-income households carry the highest debt burdens. One of the economy’s biggest problems is that a significant portion of the population attempts to service their debt in an era where salaries fail to rise in line with higher housing costs.
According to Statistics Canada, mortgage liabilities as a share of total assets are 11.5%. Both the lowest and second income quintiles report a rate of 14.9% and 15.4%, respectively. In real-world terms, this is the difference between being comfortable and feeling the pressure.
Future outlook for homeowners is bright
According to the CMHC, though, the future remains bright for Canada as it emerges from the turbulence of the pandemic. Their report said they were pessimistic about the near-term prospects for the economy and housing but expect this to transition into growth from 2024.
In an alternative scenario that accounted for some of the risks involved, Canada may experience a negative growth rate of 2% in 2024 if inflation proves more persistent.
Although these numbers may provide little confidence to homeowners, it shows that barring a significant crisis, prospects for Canadians are bright.
The battle to lower household debt over time
What is clear from industry experts is that Canada must work to reduce its overall rates of household debt in line with other G7 countries.
One benefit is that a tried-and-tested institutional framework and stringent financial regulation protect Canada. Under these rules, most housing experts predict that most Canadian borrowers should be able to withstand rising mortgage rates. But they caution that a failure to tackle high household debt could make Canada one of the worst-performing nations in a crisis.
Re-establishing the overall affordability of the housing market will mean reducing debt burdens, particularly for first-time buyers. But the only way to do this will be to tackle Canada’s housing shortages within the nation’s major economic centres.
Help is available for stressed homeowners
Any national effort to deal with household debt will take the long-term view. However, homeowners are advised to avoid relying on government help to confront tightening belts and squeezed budgets.
According to Alex Denko of York Credit Services, the profile of his average client has changed, “Typically, we’re working with people who have excessive unsecured debt – credit cards, payday loans, tax debt. At the same time, those clients are often dealing with increased mortgage rates. When you combine all that with rising inflation and interest rates, what might have been doable a few years ago is now unmanageable.”
More Canadians increasingly turn to private lenders to alleviate high debt ratios and poor credit histories. Denko says that although York Credit Services charges a small private fee, they do not financially benefit from any solution they provide.
Canadian households that struggle to deal with their unsecured debt are advised to seek help. According to Denko, “We’re usually able to get them into a debt relief solution within a matter of a week, a pretty quick turnaround time, which is important for some clients who are being pressured by collection agencies.”
Online reviews for York Credit Services reveal numerous positive experiences for ordinary Canadians. If you are drowning in debt, the time for action is now.
Denko concludes, “We stand behind our services, and we offer a guarantee that if your situation is not resolved to your liking, there is no charge because we are 100 percent confident that we are able to help those clients that we take on.”